Effect of Audit Committee Characteristics on the Audit Expectation Gap: Evidence from State Corporations in Kenya

Abstract

Audit committees are a vital mechanism that institutions need because of their ability to monitor the behaviour of the firm’s management to enhance transparency. This study sought to identify the relationship between audit committee characteristics and the audit expectation gap within the state corporations in Kenya. This study sought to specifically establish the effect of audit committee independence, audit committee composition, audit committee meetings and audit committee technical skills on the audit expectation gaps in Kenyan state corporations. The study was anchored on the institutional theory, stakeholder theory, the resource dependency theory and the agency theory. A descriptive research design was adopted, targeting 119 respondents working within state parastatals as well as 119 select personnel within state corporations who are users of the audit reports and aid in assessing the audit expectation gap. The study further adopted a census sampling of the respondents. The sample size for the study was 238 individuals. The study relied on primary data that was collected using semi-structured questionnaires and key informant interview schedules. This was supplemented using secondary data that was sourced from government reports and published reports. The research instruments were tested with 24 respondents. Statistical tests utilized in the study were correlation tests, regression analysis, and ANOVA tests. The study was able to obtain a response rate of 87 audit committees’ members and 87 users of audit committee reports. The findings of the study indicated that there was a statistically significant positive effect of audit committee characteristics and the audit expectation gap within state corporations. The results of the study indicated that audit committee independence, audit committee composition, audit committee meetings, and audit committee technical skills had a positive effect on the audit expectation gap. From the results, the study concluded that audit committees should ensure that their independence is not violated to ensure impartiality in their reporting. The study as well concluded that audit committees should ensure regional and gender representation was achieved in the committees. Further, the study recommended that audit committee members should possess accounting skills as well as be averse in financial management as this would reinforce their audit function. The study further specified that audit committee members should conduct a periodical review of their compliance with the regulatory requirements. The study recommends that audit committees should ensure their independence is not compromised. The audit committees should also emphasize on the minimum number of members, ensuring that attendance levels are at the required standards. Committees should similarly ensure that they should have frequent meetings after a specified number of days. The audit committees should also ensure there is diversification in membership as this would influence the quality of the committees’ report. The study faced some limitations in data collection due to the unavailability of some of the audit members. The study recommends that future research should assess the effect of corporate governance practices in state corporations.